The rules of finance have been turned on their head in the meme-stock era. Now when a company’s prospects deteriorate and short sellers bet a stock will fall further, retail investors often ignore the financial fundamentals and pile in anyway. Even modestly encouraging news can then suffice to squeeze hedge funds out of their bearish wagers and for the shares to power even higher.
GameStop Corp. and AMC Entertainment Holdings Inc. led the retail buying wave, but right now there’s no better example of this new speculative paradigm than space tourism company Virgin Galactic Holdings Inc.
Barely a month ago, Richard Branson’s suborbital space travel venture was looking a bit shaky. Its flight-test program was potentially facing yet another delay, sowing further doubts about the company’s technology. Management upheaval and stock sales by Branson and Chairman Chamath Palihapitiya compounded the sense of drift. With analysts paring back their financial forecasts and rival Jeff Bezos’s Blue Origin gaining ground, Virgin Galactic’s market value had shrunk to less than US$4 billion by mid-May.
One successful test flight later, plus receipt of the regulatory approvals needed to carry paying customers to space, and Virgin Galactic is looking a lot more chipper. News of the Federal Aviation Administration’s blessing caused the stock to soar almost 40 per cent on Friday when nearly US$14 billion worth of shares changed hands. The market capitalization has swelled to about US$13 billion, meaning short sellers have yet again suffered painful losses betting against a retail-investor favorite. (Short interest represents about one-fifth of the Virgin Galactic float.)
For now this transformation is built on weak foundations. The company has yet to complete its flight-test program — three more tests are due in the coming months. What’s more, space tourism has a relatively light-touch oversight compared with the regulation of commercial aircraft. FAA certification “addresses propulsion and trajectory aspects of spaceflight missions and public safety on the ground rather than passenger safety,” according to this Congressional Research Service report. As with its competitors, Virgin Galactic’s customers will be required to sign a waiver acknowledging the risks. The company has 600 reservations but will need to convince more very rich joyriders to sign up.
Virgin Galactic is also benefiting from the stock market’s pivot back toward speculative technology investments, a function of more muted inflation worries that could yet return.
Regardless, the soaring stock price gifts Branson an opportunity. Though Virgin Galactic still has more than US$600 million of cash, this cushion depletes by about US$60 million every three months. Even if commercial services commence next year, the company won’t generate positive free cash flow before 2028, analysts at Morgan Stanley believe. It growth ambitions will require investments in expensive new space ships.
Last month management noted on an earnings call how “historically, we've looked to take advantage of favorable market conditions to raise capital for the business.” It recently filed a shelf registration providing the flexibility to sell US$1 billion of mixed securities. So shareholders shouldn’t be surprised if the company decides to act.
AMC and Gamestop have shown that diluting shareholders might not cause a stock to sink as much as you’d expect. The more Tesla Inc.’s stock rose last year, the more analysts were convinced it would be able to keep issuing shares cheaply to pay for new plants and technology. Once reflexivity takes hold, it can be a powerful force.
Earlier this month Bezos grabbed the spotlight from Virgin Galactic by saying he’d be aboard Blue Origin’s first crewed flight on July 20. Given his talent for self publicity, I wouldn’t put it past Branson to try to beat the Amazon.com Inc. founder to space, which might then juice the stock even more.
Indeed, Branson should know better than most corporate leaders how to charm the Reddit crowd: He’s managed to preserve an anti-establishment image even while amassing an US$8 billion fortune and decamping to the British Virgin Islands, a tax haven.
As is often the case, retail investors may be getting ahead of themselves. Still, by propelling the stock to the heavens, they have effectively extended an invitation to Branson to boost the company coffers. He’d be mad not to take it.